Global

Details

  • Industry: Automotive, Industrial Manufacturing
  • Type: Survey report
  • Date: 6/4/2012

Business models that bring the customer closer 

Business models

Global manufacturers are building closer relationships with their customers, who in turn are coming to expect more as a result of advances in manufacturing technology. The result is a trend towards more service-oriented business models.


The business models of many global manufacturers are expected to become more service-oriented.


Global manufacturers are ramping up their innovation activity and aiming to provide more sophisticated solutions than their smaller rivals in pursuit of high-margin growth. They are therefore building closer relationships with customers, who in turn are coming to expect more as a result of advances in manufacturing technology. When survey respondents were asked which features of their business they expected customers to find most important over the next 12 to 24 months, “customized solutions” (cited by 46 percent) was second only to new products (47 percent).



The business models of many global manufacturers are, in turn, becoming more service-oriented. It is a natural consequence of the low-growth environment, since the development of new service offerings involves lower risks and costs than the development of new products or markets. It is also a natural consequence of the technological advances in the sector, which are continually reducing the need for the direct employment of people on production lines. As The Economist noted in its special report on manufacturing and innovation,3 the “manufacturing output [of the US] in dollar terms is now about the same as China’s, but it achieved this with only 10 percent of the workforce deployed by China.” This huge difference in productivity is thanks in large part to technology, which China will undoubtedly seek to acquire in the future.


To differentiate themselves from their competitors, global manufacturers therefore must orient their business models more toward value-added services such as development and maintenance contracts, as well as other forms of ongoing collaboration. At the same time, they must be willing to experiment with new cost structures, to ensure that the costs associated with this shift do not conflict with other lines of business.


Overall profitability

The “manuservice” model

The survey finds evidence for the continued rise of the “manuservice” model in which manufacturers provide after-market services related to their products. Asked in which areas they expected to make significant changes to their business model over the next 12 to 24 months, 49 percent of respondents worldwide said “value proposition,” referring to pricing model or added-value arrangements such as maintenance services. This was the third-place choice after “cost structure” and “target sales markets”, results that were to be expected given the continued importance of cost control established elsewhere in our survey and the retrenchment of manufacturers to core markets, also expressed in other data.


Furthermore, new/enhanced customer services were predicted to make a significant or very significant contribution to profits in the next 12 to 24 months by 63 percent of respondents worldwide – a rise of nine percentage points over their impact on profits over the past 12 to 24 months (see chart above).

Moving closer to future customers

To deliver more tailored solutions and services – while maximizing responsiveness and minimizing cost – global manufacturers are also positioning their facilities close to end-markets. A majority of respondents worldwide believe nearshoring is either “effective” or “highly effective” at improving agility, lead times, risk management, information flow/synchronization, and total cost.


Moving closer

They are also becoming more sophisticated about where they locate their offshore facilities. Many, for example, now use a “China +1” strategy – adding an additional production base in a lower-cost country in Asia. In this way, they can maintain their responsiveness to the burgeoning Chinese market without being so beholden to its wage inflation, which in recent years has been running at around 20 percent annually.


Asked which direction they believe the nearshoring trend will take over the next 12 to 24 months, 46 percent of survey respondents worldwide say they think it will increase while 50 percent say it will stay the same; only 4 percent predict a decrease. However, perspectives differ both by region and level of market development. On the latter difference, 53 percent of those from emerging markets believe the trend will increase against 41 percent of those from developed markets – more evidence to support the notion that emerging-market manufacturers seek to catch up with their developed-market rivals in terms of supply chain sophistication.

 

3 The Economist, 21 April 2012, pp50.

 

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